Astute investors snapping up high quality stocks on discount after market crash caused by Covid-19


By Lee Min Keong

For many investors around the world, the onslaught of the Covid-19 pandemic wreaked havoc on their investment portfolios as stock markets tanked in late February and March. 

From the lows of late March, equity markets including Bursa Malaysia rebounded significantly in April though it remains to be seen whether this just a “dead cat bounce” or an unsustainable rally within a bear market. 

Investors are understandably concerned the lockdown imposed in many countries, including Malaysia, will tip the global economy into a deep recession. In the event Malaysia falls into a recession, this will be the first time since 2009 that the economy has contracted.

In such a scenario, investors will be preoccupied with preserving their investments in case the markets drop further. Nevertheless, astute investors are licking their chops in anticipation of a market crash that will enable them to swoop in to snap up a host of quality assets at a steep discount. 

Despite the volatility in the capital markets, FSMOne assistant research manager Tan Wei Yine thinks there are still opportunities residing within equity markets.

However, he cautions that while global equities have rebounded strongly from their March lows, there is still “a great deal of uncertainty” surrounding the containment progress of Covid-19 across the globe.

“In the coming weeks, macroeconomic data reflecting Covid-19’s impact on the economy are going to surface with more negative signs, which could inject an additional dose of volatility in stock markets.”

On whether the rebound from the March lows is just a rally within a bear market, Tan notes that from a historical perspective the S&P 500 Index has seen 16 bear markets (excluding the current one) over the past 90 years. 

“With hindsight, four out of those bear markets have posted intermittent bull market rallies of more than 20% before trending lower later. Although counter-trend bulls may not appear as often, it would be unwise for one to rule out the possibility of it happening again completely,” he adds.

Rebalancing investment portfolios

So, what strategies should investors adopt during times of market stress such as now? 

FSMOne advocates investors to have a mix of equities and fixed income that is aligned to their risk profiles, explains Tan.

“In market distressful periods, the fixed income portion of the portfolio could help provide stability and in decent times, the exposure to equity markets could help capture capital growth opportunities. 

“Investors may find it easier to hold onto a risk-aligned portfolio in challenging times. 

"An investment portfolio that has large, concentrated exposure to volatile assets may induce huge swings in emotions that could lead to poor investment decisions in market distressful periods,” he adds.    

Tan advises that an investor should hold a portfolio that aligns with his risk profile. For instance, a balanced investor should have equal weights of 50:50 into equities and fixed income. 

In a market downturn, the equity allocation is expected to decline along with the drawdown in stock markets’ movement, while the fixed income portion that is holding up relatively well should have a higher allocation (e.g. the portfolio now has <50% to equities and >50% to bonds), he explains.

Investors may take the opportunity to rebalance their portfolios by reducing their fixed income exposure and increasing equity exposure, bringing those allocations back to the neutral level of 50:50, he adds.

“Mainly, investors are selling high (fixed income prices that held up relatively well) and buying low (equity prices that have been battered heftily). As there is still a great amount of uncertainty surrounding Covid-19 over the near-term, we recommend investors to rebalance progressively when equity markets continue to decline,” he advises.

Preserving your capital

When markets turn bearish, investors will need to adopt a defensive stance when it comes to their portfolio. 

Affin Hwang Asset Management chief marketing and distribution officer Chan Ai Mei says as a defensive measure, investors can diversify and opt to tilt their allocation towards fixed income and bond funds. 

“Its more modest drawdowns can help ensure capital preservation as well as provide a measure of stability through a regular income stream,” she says.

To position their portfolios and navigate through volatility ahead, investors should first review their portfolios and assess if they are comfortable with the level of risk they are taking. Ideally, investors should also rebalance their asset allocation annually to correct any portfolio drifts, she adds.  

“If liquidity is crucial, especially for conservative investors who have retired or are approaching retirement, we believe it is appropriate for them to reduce exposure in equities. This might forego some future upside, but is ideal to help preserve and protect capital. 

“Within fixed income, conservative investors should also tilt their allocation towards investment-grade bonds and avoid high-yield exposure.”

For investors sitting in the middle of the risk-profile spectrum and want some equity exposure, an important question they need to ask themselves is whether they can stomach the volatility for the next three to five years? 

“If the answer is yes, then investors should average down and split your investment into a few tranches to ease your way into the market,” Chan advises.

Timing the market?

With equity markets rebounding from recent lows, should investors consider buying the dip? Is it even possible to know when the market’s bottom is reached?

Chan believes there is always an element of danger in timing the market. “Even the savviest investor can get it wrong. The ongoing Covid-19 episode has shown how sudden and vicious markets can turn, especially coupled with the presence of algo-traders that have exacerbated volatility. 

“Instead of trying to time a market in a downturn, the ideal approach for investors to take may be to just do nothing at all.”

To illustrate, Chan examines how an investment of RM100,000 fares through different market cycles and how it would fare under two different scenarios:

Action 1 - SELL :  The investor cuts losses by selling in every market downturn; and

Action 2 - HOLD : The investors hold and does nothing in every market downturn.

As can be seen from the tables, the investor who does nothing would perform better overall. Thus, investors should endeavour to spend time in the market instead of trying to time the market, she says.

“Avoid making drastic shifts in one’s asset allocation, whether it is ploughing into the market or cashing-out all at once.”

The value of waiting

Chan also highlights what investing legend Charlie Munger – Warren Buffett’s right-hand man – once said: “It is waiting that helps you as an investor, and a lot of people just can’t stand to wait.”

In this type of market environment, she says investors’ nerves are bound to get frayed and they may start turning jittery whenever they see a new headline about new infection rates or whispers about a recession or layoffs. 

“We believe investors stand to benefit more by doing less in 2020. Once the Covid-19 contagion recedes, there will be very little impact to long-term investment decisions and fundamentals. As such, we don’t advise doing much on your portfolios. 

“It is crucial that investors stick to their asset allocation and stay prudent in this current volatile landscape. Investors who remain disciplined in their approach by investing consistently and sticking to their long-term asset allocation will eventually reap the benefits and fare better overall,” Chan concludes.

Read the full article in the May/June issue of Smart Investor.  Download a free digital copy of Smart Investor below.